Saturday, December 29, 2007

Hold On Tight

Another lap around the Sun and we're all wondering what comes next. For me there are reasons to be cheerful and reasons to be fearful going into 2008. So here goes:

Reasons To Be Cheerful

Living in Ireland: ours is a peaceful, prosperous and free country - relatively speaking - and as such we are better able than the greater part of humanity to successfully weather most economic storms.

Youthful Energies: we still have one of the youngest populations in Europe, recently augmented by immigration, with the result that our culture is still shaped by the virtues of ambition and future-orientation; definitely more New Europe than Old Europe.

Good Governance: okay, stop laughing, let's just say 'not such a bad sort of governance'; though we may have too many politicians, being busy bodies, we are blessed with a political system that usually doesn't go to extremes - providing some degree of predictability for those of us creating the wealth and the jobs (and paying the taxes that the politicians then spend for the, er, greater good).

Making Poverty History: fortunately not all the good news is confined to our own little island, as we observe the powers of personal and market freedom to raise millions out of poverty in Africa and other parts of the world; supported - where appropriate - by innovative aid initiatives.

Reasons To Be Fearful

Energy Shocked: this is still the Big One for me, and while we can ride out financial turbulence we can't outrun the laws of thermodynamics; so my expectation is that we will see the price of oil break through the psychological $100 per barrel barrier in 2008 - one more milestone on the road to a nuclear-powered future for Ireland (whether we generate our own or import nuclear electricity from the UK), with or without alternative sources as well.

Weak Foundations: Ireland's housing market is like its stock market, it tends to overshoot in both directions (over-valuation in the boom times, under-valuation in the doom times); and the trajectory will definitely be toward the under-valuation side in 2008 (and possibly over the rest of the decade) - but having off-shored our monetary policy to the European Central Bank there is little we can do but hope for a more benign interest rate environment in the months ahead.

American Nightmare: again lifting the gaze from our own, relatively fortunate island, one of the biggest uncertainties facing a trade-dependent nation like Ireland is the outlook for the US economy; not least because the US is in the frontline of a wrenching adjustment to the sub-prime crisis that may yet take the world's economy down with it.

Ethnic Tensions: maybe we Irish really are lucky, for the experience of mass immigration in recent years has been accompanied by remarkably little social strain or strife compared with the experience of many other countries including the UK, at least for now; but a failure to progress the integration and naturalisation of those immigrants who want it will risk much, if not all that has been gained from immigration - especially if we experience a sharper economic slowdown than projected.

On Balance

It seems to me that the 'balance' of cheerful and fearful thoughts on the year ahead nets out in favour of the optimists for once (and perhaps surprisingly so, given the generally gloomy outlook of most Irish commentators). But I am only thinking of us folk in Ireland - I'd be firmly in the camp of the most despondent pessimists if I happened to live in Pakistan or Zimbabwe or Afghanistan. So let's count our blessings going into 2008 - and show some consideration to those much less fortunate than ourselves as we begin another lap around the Sun.

Postscript

As a lifelong Economist reader, I strongly recommend their guide to The World in 2008 for those of you looking for a somewhat less parochial perspective than my contribution above.

Thursday, December 27, 2007

Ulster Says Nil

I got to spend St Stephen's Day with 18,000+ others watching Felipe Contepomi clock up the points in a 29-0 victory over Ulster. It was definitely a game of two halves - the first half it seemed everyone, players and supporters, were still suffering the after effects of too much Christmas turkey. The second half was much more entertaining, especially for those of us in the North Stand (from where I took this photo) as we got to see Leinster's excellent tries close up.

It was also a great 'herd' experience - as written about by the always interesting Mark Earls. Still, I did feel a pang of sorrow for my fellow Ulstermen (though I guess I'm more of a Leinster fan these days), but some of the comments from the stands on their performance were very amusing. Not of course that any of us would say it to their face! Which reminds me of the joke over at The Adam Smith Institute blog:
A guy in a bar leant over to the guy next to him and said, "Wanna hear a blonde joke?"

The guy next to him replied, "Well before you tell that joke, you should know something. I am 6' tall, 200 lbs and I am blond. The guy sitting next to me is 6'2, weighs 225 and he's blond. The fella next to him is 6'5" and 250 and blond. Now, you still wanna tell that joke?"

The first guy said, "Nah, not if I'm gonna have to explain it three times."

Greed is Good, Charity is Better

I took this photo on Christmas morning as I joined hundreds of spectators watching dozens of swimmers diving off the 40ft in Dun Laoghaire. Many of the swimmers were there to raise money for charity - and a number of charities were there with their collectors and boxes.

It certainly captured the Christmas spirit for me - a reminder that concern for others is one of our most defining characteristics as human beings. Though we can't all aspire to the heights of charitable giving propounded by the great Jewish philosopher Maimonides, the important thing is to start. And for those of you caught in the PAYE/PRSI net don't forget that any donations you make to recognised charities between now and 31st December mean that taxes you would have paid go straight to the charities instead.

If, on the other hand, you happen to work for one of the charities, beware the 'crowding out' effect. Recent research shows that once charities receive grant aid directly from government then for every €1,000 they receive from the government private donations fall by €560. This is mainly because charities invest less effort in fund raising, and also because private donors see the state funding and figure their own contributions won't make much difference.

I suspect that many of Ireland's third world charities now benefiting from the burgeoning budget of Irish Aid will soon find themselves victims of the crowding out effect if they don't carefully manage the impact of state support. A million miles away from the enthusiasm and joy of Christmas morning swimmers - let's hope it remains that way.

Sunday, December 23, 2007

Is Jesus a Catholic?

The news that Tony Blair has become a Catholic has been a cause for some reflection in the British media today. The Telegraph even goes so far as to suggest that 'Britain has become a Catholic country', observing that there are now more Catholic church goers than Anglican church goers in England.

Some commentators suggest that the recent influx of Polish immigrants to the UK has boosted the apparent 'strength' of the Catholic Church there. Similarly, there is anecdotal evidence of a 'Catholic renaissance' here in Ireland - as Polish priests are flown in to tend to their flock in their native tongue. The success of the Vatican Board Game (I kid you not!) may be further testimony to a new resurgence in the Catholic Church. A last minute Christmas stocking filler perhaps ...?

But more interesting is the fact that a former Prime Minister should make such a public, even 'belated' decision about his religious beliefs. It is this rather than his choice of Catholicism per se which has warranted such widespread commentary. I have just finished reading Jennifer Michael Hecht's delightful book Doubt: A History, and Blair's decision in some ways bears out her analysis of the place of religious doubt in contemporary Western societies. Hecht rightly criticises the current, extremely polarised debate between religion and atheism as personified in the latter case by Richard Dawkins, whose book The God Delusion has so far sold over 1.5 million copies. She makes the point in her review of the history of doubt since the writings of ancient Greek philosophers that there are many shades of grey between the black and white extremes of fundamentalist theism and fundamentalist atheism. The value of doubt in Western thought has been to avoid (though not always successfully) the extremes of absolute conviction that have historically provided an eight lane highway to hell (on Earth) for believers and doubters alike.

You can listen to an engaging interview with Hecht over at America Public Media's Speaking of Faith website, and while you are there take the Scale of Doubt quiz to see where you are on the theism-atheism spectrum. You might be surprised.

Finally, I rarely read let alone recommend Papal Encyclicals, but those of you interested in the current debate about faith and doubt in the West might check out the pope's latest writings on reason, faith and hope in his encyclical Spe Salvi. Pope Benedict XVI is comfortable quoting secular writers as well as traditional Christian teachings in relation to the challenges facing comtemporary, secular societies - while at the same time delineating a place for reason as well as faith in the 21st century.

It certainly stands head and shoulders above the Ned Flanders level of 'religion lite' exemplified by some Christian writers such as Rick Warren; deconstructed in an entertaining and enlightening way by Bob Price in his reply to Warren called The Reason Driven Life.

So as a 'sympathetic doubter' I hope that Western Civilisation continues to benefit from the creative tensions between faith, reason and doubt that have made us what we are today.

Saturday, December 22, 2007

Tir na Saibhir

The latest issue of Prospect magazine features a cover story on 'The Lucre of the Irish'. The story is essentially about a new generation of wealthy property developers and their high profile, high spending lifestyles. It's an entertaining one at that.

Ireland, like America, has experienced an unprecedented wealth boom in the past decade, driven mostly by land and property values. This new 'Richistan' - or 'Tir na Saibhir' to give it a more local flavour - is populated by first generation millionaires and billionaires with no previous history of serious wealth.

We had further confirmation of our new found status in statistics released by Eurostat earlier this week. These show that GDP per capita in Ireland is now nearly 50% above the EU average - second only to Luxembourg among the EU27 nations.

As we move from being the Nouveau Riche of Europe to joining the ranks of Old Money, what kind of people will we become? Michael D. Higgins TD observes about the wealthy Irish in the Prospect story that:
There is a gangster charm about some of the property people. But what I regret is they haven't the imagination to fund an orchestra, or a piece of public sculpture.
Does an embarrassment of riches lead to a poverty of imagination? Perhaps - though it may be too early to tell. Still, I can't help noticing that in the United States, many of the most generous contributors to philanthropy are founders of hedge funds (reported in the latest issue of Portfolio) - and are therefore very much in the same 'nouveau riche' category as many of Ireland's wealthy. But I don't see quite the same level of philanthropic endeavour among our own wealthy.

That said, we don't have the same culture of philanthropic effort in Ireland as in America, partly because we have a more developed social welfare system; and partly because we don't have the same peer effect to 'raise the consciousness' of wealthy Irish. That may not matter for now, after all you need to create the wealth before you can do the philanthropy. And I suspect most wealthy Irish are still focused on keeping and growing the 'success' they have enjoyed to worry for now about 'significance'.

I do expect though that we will see more imaginative examples of Irish philanthropy in the years and decades ahead - including Michael D's orchestras and public sculptures.

Friday, December 21, 2007

Half Glass Forecasts

Samuel Britton, an economic journalist I have long admired, observes in a recent FT article that:

Friedrich Hayek once said that he knew few people who had made money from acting on economic forecasts, but a good many who had made it from selling them.
The latest Quarterly Economic Commentary from the ESRI is certainly one of the more difficult ones to act on, if you feel so inclined. It looks like the economic glass in 2008 will be 'half full' or 'half empty' - depending on your point of view.

The publication this week of the latest Eurobarometer survey shows the Irish to be relatively optimistic about 2008. Only 7% expect 'your life in general' to be worse over the next 12 months, while 36% expect life to be better. However, 34% expect the 'economic situation in Ireland' to be worse next year, and only 18% expect it to be better. It is the usual story of 'private comfort and public concern' that I've written about before in relation to consumer confidence. That said, even though the top two concerns for European citizens are unemployment and inflation respectively, for Irish citizens their top two concerns at present are crime (at 57% of all adults) and healthcare (45%) - among the highest ratings of all EU27 countries.

It might be more accurate therefore to say that Irish consumers are 'less optimistic' about the outlook for the economy rather than unduly pessimistic. So I am inclined for once to take the 'half full' view of prospects for next year, especially in relation to consumer spending. The ESRI forecasts a 3.8% growth rate for real consumer spending - about half this year's rate, but still respectable in an EU context. Add to that consumer price inflation of 2.5% and you get a total consumer spend of €97.1 billion, or €5.8 billion more than this year.

That's a lot of extra consumer spending whichever way you look at it.

Wednesday, December 19, 2007

21st Century Universities

It is fascinating to watch how the internet is transforming the world of education. The university as we currently understand it is an Islamic innovation, dating from 9th century Morocco.

The format of a central location that teaches and awards qualifications has changed little since. But the arrival of the internet - and in particular mass market broadband access - is about to change all that.

As usual, it's the Americans who are leading the way in this regard. World class institutions like the Massachusetts Institute of Technology are now making their lecture and course notes available free online (thanks to the tip on this from UCD's Geary Institute, by the way).

Of course, distance learning has been with us for some time. Of more interest is how some universities are now seeking to engage more directly as educators with their wider community. Take, for example, UC Berkeley's fascinating initiative with its Greater Good Magazine. Here's their 'mission statement':
Greater Good highlights ground breaking scientific research into the roots of compassion and altruism. It fuses this science with inspiring stories of compassion in action, providing a bridge between social scientists and parents, educators, community leaders, and policy makers.
Check out the latest issue on The 21st Century Family for some great examples of applied social science.

Of course, it isn't just the third level institutions themselves that are driving educational innovation. My favourite is Apple's iTunes U - listen to the best lectures from the best universities around the world, for free.

From Morocco to MP3 files in just over 1,000 years - and the next 10 years will likely see even greater innovation.

Tuesday, December 18, 2007

Santa vs. Politics

Christmas isn't Christmas without earnest press articles condemning the 'crass commercialism' of it all. I've written in praise of consumerism before, but I take my hat off to Don Boudreaux over at Cafe Hayek who has this to say about the Christmas commercialism backlash:

I challenge this notion. Commerce is peaceful. It involves sellers working hard and taking risks to bring to market goods and services that consumers want to buy. No one forces anyone to do anything; all is voluntary.

What truly is crass is politics - that sorry spectacle of power-seeking ego-maniacs who, when not pronouncing platitudes, are promising to help group A by picking the pockets of group B. While commerce is honest, politics is duplicitous. While commerce is peaceful, politics inevitably pits citizen against citizen. Far more enlightened and ethical behavior is on display during any one day in a shopping mall than the most intrepid observer will find in a century on Pennsylvania Avenue.
So go shop - you'll be doing more for peace and good will to all men than any gathering of politicians ever will.


Monday, December 17, 2007

Once In A While

I finally caught up with the movie Once at the weekend. It is a delightful movie with engaging acting, wonderful music and a storyline that avoids (most of) the cliches.

More than that, it is a movie that captures Dublin at a certain time (i.e.: the present) as reflected in the theme of immigration and cultural fusion at the heart of the story.

I also kept thinking of that other great Dublin movie: The Commitments. Like Once, it captured Dublin at a certain period in its history. I also watched it recently and I was struck - stunned even - by how much the city has changed since the movie came out in 1991.

In a way, the two movies provide neat, cinematic bookends to a decade and a half of extraordinary change in our capital city. Charting our course, if you like, from being "the 'blacks' of Europe" to being one of the most cosmopolitan countries in the EU.

But never mind the history and sociology, both movies have succeeded on the strengths of their energy and their music - and deservedly so. Once is definitely one for the Christmas stocking for those of you looking for ideas.

Sunday, December 16, 2007

Mob Rule

The recent fuss over pay rises for the Taoiseach and other public officials left me wondering: 'what did you expect'? You ask one group of public sector officials to adjudicate on pay rises for another group and - shock, horror - they award massive pay increases to their esteemed colleagues. Surely it would have been more newsworthy if they hadn't awarded them huge pay increases - if only because it would have been right up there with flying pigs and other low frequency events.

In truth, I expect the public sector to look out for themselves - who else will? And isn't that why politicians want to be in power: to shape things they way they want them, not just for the electorate but for themselves as well? I am inclined to set the bar very low for our elected representatives, that way I am never disappointed. Russ Roberts has a nice analysis of the conflicts of interest facing politicians in democracies, and why it's usually the voters' interests that lose out from the conflict:
Pigs don't fly. Politicians, being mere mortals like the rest of us, respond to incentives. They're a mixture of selfless and selfish and when the incentives push them to do the wrong thing, albeit the self-interested one, why should we ever be surprised? Why should be fooled by their professions of principle, their claims of devotion to the public interest?

We call politicians our representatives and they often claim to be fighting for us. But when we think about it, we understand that our interests are diverse and that no politician can really fight for all of us. Inevitably, our interests and desires clash and politicians are forced to choose between the general interest and the special interest. Which wins?

This was brought home to me over the weekend reading the Dún Laoighaire Express, a free newspaper distributed to households in the Dún Laoighaire Rathdown County Council area. In it I learned that the Council is proposing axing domestic bin collections because 15,000 out of 66,000 local households have had the temerity to switch to cheaper, better private collection services. The Council has 44 refuse collectors now threatened with redundancy due to the inconsiderate behaviour of local citizens. But fear not, it seems efforts are already underway to ensure that the refuse collectors are 'redeployed within other councils services', the report assures us.

Nevertheless, both council officials and, more depressingly, local councillors are outraged at the defections of local households to private collectors. As I've written before, local councils act like they have a divine right to a monopoly on money-making services such as refuse collection. And like Tony Soprano et al, they lash out at those threatening their comfortable position (okay, admittedly without the violence and concrete anklets).

Irish politicians are not unique in this regard of course. This is from the New York Times, dated 13th December 1907 - that's right, 100 years ago:

Far-reaching effects of the great snowstorm of January, 1905, were uncovered last night by the City Civil Service Commission. The phenomenon discovered was that 1,100 street laborers still are employed by the city for the removal of that remarkable snowfall. Notwithstanding the scientific interest developed, the commission unanimously decided that from reasons of economy, a new rule be enacting limiting to five days the period for which emergency street cleaning laborers may be employed in Chicago.

According to the records, these 1,100 emergency laborers were kept pegging away at the removal of that snow all through the campaign for the election of Mayor Edward F. Dunne and all through his administration. Curiously enough, the number of men required for the removal of snow rose to 1,500 in July.

Though I don't expect Dún Laoghaire's refuse collectors to be 'redeployed' as snow removers, nothing would surprise me. What would surprise me - really and truly - would be if a single, local politician in any of the Dublin county councils actually had the guts to welcome the success of private refuse collectors, and to congratulate them on providing a better, cheaper service than that previously provided by monopolist local authorities. Pigs really would fly.

Friday, December 14, 2007

The Great Grain Robbery

This week's CPI report shows that Irish consumers are now experiencing a food price spike. The detailed sub-indices report for November from the CSO shows basic food prices rising by three or more times the general inflation rate (currently at 5.0%).

Some of the price rises are quite shocking:
  • Flour prices are up 42.0% year-on-year
  • Bread is up 15.8%
  • Milk is up 18.8%
  • Eggs by 16.2%
  • Fresh vegetables by 9.5%

What's going on? Though energy prices have been grabbing the headlines, it's food that seems to be undergoing the most far-reaching changes, with long-term consequences for Irish consumers. After all, there's always an alternative to transport - it's called walking. The alternative to eating isn't really an alternative.

According to the WorldWatch Institute, there is a fundamental shift taking place in the world's capacity for food production, and it isn't for the better. As their analysis points out, despite record grain harvests this year, prices for corn, rice and wheat etc have been driven higher by rocketing demand and falling cereal stocks. Here are just some of the trends that they have observed:

At harvest time, the U.S. corn export price was up about 70 percent from the previous year, while the American hard wheat price averaged 65 percent more than a year earlier. Wheat prices in Argentina, another major exporter, doubled since 2006. Important wheat exporters like Ukraine and Russia have imposed export restrictions to ensure a sufficient domestic supply. Major importers, like Egypt, the European Union, Yemen, and Iraq, have reacted to high prices by purchasing grain early, which has further tightened supplies and boosted prices.

And to make matters worse, a growing share of global grain output is now being directed towards ethanol production for use in biofuels:

People consume a little less than half (48 percent) of the world’s grain directly—as steamed rice, bread, tortillas, or millet cakes, for instance. Roughly one third (35 percent) becomes livestock feed. And a growing share, 17 percent, is used to make ethanol and other fuels.
More and more governments in the West (particularly the USA and EU) are championing biofuels as a way of improving our energy security. The chances of this happening are, to say the least, fraught with risk. A more cynical view is that the rush to biofuels is more about finding an alternative to traditional farm subsidies now being phased out; and that it risks doing more harm than good to the environment (as rain forests are cut down to make room for biofuel crops). Unintended consequences indeed.

The reality for Irish consumers is that the food price shock - like the oil price shock - has been mitigated somewhat by the decline of the dollar. Hence inflation in supermarkets measured by the CSO's retail sales index remains in low single digits. For now.

But beware politicians promising security: hold on to your wallet or purse because the price you pay may well be more than you can afford.

Thursday, December 13, 2007

God-Like Economists

Proof that economists do have a sense of humour - from the Adam Smith Institute blog:

An architect, a surgeon, and an economist were discussing their place in the universe.

The surgeon said, 'Look, we're the most important. God's a surgeon because the very first thing God did was to extract Eve from Adam's rib.'

The architect said, 'No, wait a minute, God is an architect. God made the world in seven days out of chaos.'

The economist smiled, 'And who made the chaos?'

Wednesday, December 12, 2007

Gorilla Marketing

Yesterday's bullish trading update from Cadbury Schweppes plc is testimony to the power of viral marketing. Or in Cadbury Dairy Milk's case, the power of 'gorilla marketing'.

The advertisement for Dairy Milk, featuring a gorilla playing drums to the air of a Phil Collins song, has been viewed 10 million times on YouTube. No surprise then that it has just been voted No. 1 in the Top 20 most popular television commercials for 2007 (you can see the ad along with the other 19 favourites at the link).

The Financial Times foresees syngergies between 'viral marketing' and traditional marketing as the shape of things to come for older brands needing to connect with a younger audience. Here in Ireland, viral marketing will be driven by the continued growth in home broadband access (about a third of all households already according to the CSO, and likely to reach over half of all households by 2010 in my view).

Nor is it just the brands that benefit: Phil Collin's 'In the Air Tonight', first released in 1981, shot to no. 9 in the UK download chart on the strength of the exposure. That's what I call synergy.

Tuesday, December 11, 2007

Baby Blue Eyes

It seems that 'old blue eyes' are actually quite young. According to Scientific American, nobody had blue eyes 10,000 years ago - even though humans have been around in our present form for nearly 200,000 years.

It seems that the pace of evolution is speeding up - by ten to one hundred times the average long term rate. Indeed, the authors of the research reviewed in Scientific American suggest that we are now more different genetically from our ancestors 4,000 years ago than they were from Neanderthals. That's a lot of difference.

What's driving the change? The answer is: we are. Culture and the opportunities created by the development of first agricultural and then urban societies create a unique environment in which random genetic mutations (such as blue eyes) can spread more rapidly within the human population than they could have in the past.

There is a (genuinely) entertaining discussion about genetic mutation in the latest edition of In Our Time on BBC Radio 4 (easily the most intelligent radio programme on the planet, in my totally unbiased opinion of course). The programme informs us that genetic mutations take place in each of us literally thousands if not millions of times every day. Most are repaired by our body's defence systems, and of those that aren't many are benign but unfortunately some are malignant (think cancer). However, every once in a while a genetic change takes place that provides some genetic advantage and is quickly spread to the next generation and throughout the population.

The programme also tells us that men are more susceptible to genetic mutation than women (the former produce sperm all the time with the genetic risks that go with the process, whereas women are born with all the eggs they will ever produce already in place in their ovaries). Like I said, a really interesting programme of the 'I-didn't-know-that' variety.

So what does genetic acceleration mean for the future. Here's one commentator on that very question:
Finally, now that we are addressing culture, it might be important to consider the possibility that recent acceleration of human adaptive evolution may not apply simply to genetic processes! It may be that a Lunar Society can only exist in a population of a certain size where a critical mass of oddballs are in communication. It may be that men of singular and incomprehensible intellect such as Isaac Newton are only imaginable in the sample space of possibilities when our base population has increased enough so that impossible genius crosses the threshold to improbable genius. This summer I had lunch with some economists and they kept talking about the idea that as human population increases the number of innovations would increase and so the frontier of the rate economic growth would naturally expand outward in value. Ultimately Nature is One, and insights and logic which bear fruit in one branch of science may be more relevant than we thought across the whole arc of creation.

What this says to me is that if the next Newton or Darwin or Einstein is going to be born in Africa or Asia or Latin America then he (and it will most likely be a 'he' for the reason referred to above) will only get to share his gifts of genius with the world if he grows up in an environment that provides him with the nutrition, security and education necessary to become a healthy, mature adult. Yet another reason why ridding the world of the scourge of extreme poverty should be the number one priority for all of us.

Sunday, December 9, 2007

Free Trade not Fair Trade

This weekend saw advertisements in Irish national newspapers calling on the Taoiseach to "ensure Ireland's aid to developing countries is not undermined by unfair trade agreements" currently being negotiated by the European Commission. The assumption behind the advertising campaign (supported by some, though not all of the leading Irish 'third world' charities) is that 'free trade' is being forced on poor African countries to their detriment.

This assumption is flawed in every regard. At the heart of the EU/African negotiations is a desire to reduce tariffs and barriers to trade imposed by both regions on one another's products and services. Why do tariffs exist? Fundamentally there are two reasons:
  1. To raise taxes for the governments imposing the tariffs.
  2. To protect industries and sectors favoured by the same governments.
Most governments most of the time operate tariffs as barriers to trade. But Paul Collier poses the question 'Why do governments of the bottom billion typically adopt high trade barriers?' in his book 'The Bottom Billion - Why the Poorest Countries are failing and What Can Be Done About It'. Here is his answer:
Partly because they are one of the key sources of corruption. That's why political reformers such as Marc Ravalomanana in Madagascar, Emmanuel Tumusiime-Mutebile in Uganda, and Ngozi Okonjo-Iweala in Nigeria all made trade liberalisation a priority. The corruption generated by trade restrictions works on both grand and petty scales. On the grand scale, governments confer protection on the businesses owned by their friends and relations, or ones that pay for the privilege. At the petty scale, actually running the system of protection day to day can be lucrative. Becoming a customs officer is about the best job you can possibly get in these countries.
Corruption is the evil, symbiotic twin of trade barriers. Yet we have organisations like Christian Aid, Oxfam and Trócaire campaigning to stop the removal of trade barriers, seemingly in denial about the harm that they cause to the citizens and consumers caught behind the barriers. Fundamentally their objections are ideological. Like so many NGOs, they view businesses and their activities as suspect at best, and malevolent at worst. They look to governments and international bodies to 'protect' the poor in developing countries from evil capitalists, ironically missing the point that it's usually the same governments that the poor need protection from.

Why is this? Here's Paul Collier again:
Seeing everything through the spectrum of rich countries oppressing poor countries, these agencies spend charitable donations opposing the reduction in African trade barriers. Lenin had a phrase for those in the West who supported him without understanding his true intent: "useful idiots". Today's useful idiots campaign for trade barriers.
I might add, these agencies are not only spending charitable donations received from private citizens and some corporate supporters on their ludicrous campaign, they are also spending the taxpayers money that they receive in increasing amounts from the rapidly expanding budget of Irish Aid.

So what's the answer to the pressing problems of poverty and trade barriers that perpetuate it? Some say it is initiatives such as 'Fair Trade'. I'm not so sure myself - even though personally I like the idea of the farmers and their families getting more of the money I spend on a cup of coffee. Who doesn't? And yet, as has been argued clearly by economists examining the trade issue in detail, Fair Trade is in danger of perpetuating the problem by effectively locking people into subsistence farming when in fact they should be moving on to other types of work. Listen to the recent interview with Mike Munger over at EconTalk for a more detailed critique of the Fair Trade initiative.

To my mind, it is initiatives like Traidlinks that will do more to raise the standards of living in Africa (with brilliant innovations such as their 'Heart of Africa' range) than the self-deluding blather of some Irish NGOs. There is a growing number of entrepreneurs, businesses, and profit-driven organisations doing good and making a real difference in the lives of millions around the world. Check out Fast Company's Social Capitalist Awards for truly inspiring ideas and stories.

So my advice to the Taoiseach is to ignore the "useful idiots" and to ensure that Ireland champions free trade as a way of raising billions out of poverty just as it raised our own standard of living in recent decades.

Thursday, December 6, 2007

Science vs. Sport

Sometimes it's the answers people don't give to surveys that are as interesting as those they do give.

Take the latest Eurobarometer report on 'Scientific Research in the Media'. Not a subject to get the pulse racing, and plainly it didn't in the case of the unfortunate 1,000 Irish people grilled by the European Commission's survey unit.

Asked if they were 'Very Interested, Fairly Interested, Not Very Interested or Not At All Interested in Scientific Research', the Irish respondents made it pretty clear that the issue was up there with watching paint dry in their list of favourite pastimes.

Indeed, despite our frequent cultural protestations that we are really Southern Europeans at heart (somehow accidently removed from more appropriate Mediterranean climes), when it comes to science we are distinctly Eastern European in outlook.

Take the finding from the survey that only 41% of Irish people are 'Very or Fairly Interested in Scientific Research' (compared with an EU27 average of 57%). This is the lowest level of interest of any of the EU15 countries, and we are only 'surpassed' by Poland, Lithuania, Slovakia, Czech Republic, Romania and Bulgaria who have even lower levels of interest.

Is there any redemption in the survey findings? Fortunately yes. When asked 'In which of the following news related issues are you most interested in…?', the proportion in Ireland choosing 'Sport' is the highest of all EU27 countries at 54% (compared with an EU27 average of 40%). So there's a clue for any educators and broadcasters fretting about the low level of interest in scientific research in Ireland. Just major on the 'science of sport' and you'll have their undivided attention.

Wednesday, December 5, 2007

Staying Married for the Environment

We've all heard that divorce is bad for children. Now we learn that it is bad for the environment as well. New research shows that divorce inevitably increases the number of households ('one' becomes 'two') and that therefore the environmental footprint of the family affected in effect doubles.

As one of the authors put it:
People have been talking about how to protect the environment and combat climate change, but divorce is an overlooked factor that needs to be considered.
Maybe the next IPCC report will encourage governments to restrict access to divorce as part of the response to climate change? Or perhaps as part of the Irish Government's new climate campaign we will see a call to fractious couples to 'stay married for the sake of the environment'?

I doubt it somehow. Still it's a relief to come across research that shifts the focus away from all the harm climate change is apparently causing (some 600 effects and counting), to what is causing climate change.

Tuesday, December 4, 2007

The Joy of Quirkology

The latest podcast from Point of Inquiry features an interview with psychologist and magician Richard Wiseman. He has written a number of books on social psychology and the ways in which people see - and often don't see - the world around them.

You can check out his main web site here, but do go to the website for his new book 'Quirkology - the Curious Science of Everyday Lives' which addresses a lot of issues in relation to neuro-economics and social psychology that I have written about elsewhere on this blog. There are lots of 'quirky' insights into what makes people tick - and they are not just relevant to marketers.

For example, if you are in the charity business take note of his findings that red-coloured collection boxes are much more effective than any other colour in terms of amounts given; and better to advertise on your collection box that 'every cent helps' rather than 'every euro helps' as the latter makes people feel mean, so they don't give anything!

Wiseman's Quirkology website has some great content, in particular, click on 'The Videos' link and check out 'The Colour-Changing Card Trick'. I promise you'll want to go back and look at it again! Over 3 million viewers on YouTube can't be wrong ...

Monday, December 3, 2007

The Dangers of 1,3,7-Trimethylxanthine

This week is Budget week. There has been the usual media speculation about what Minister Cowen might or might not do in the first Budget of the new government.

There seems to be a consensus, however, that he is going to raise duties and taxes on alcohol - using fiscal policy to deliver health policy in effect. This follows on from a report by the HSE on Alcohol Consumption in Ireland 1986-2006, and their call on the government to increase alcohol taxes by 10%.

The HSE report shows that we are well past the peak of alcohol consumption in Ireland (beer peaked in 1999, spirits in 2002 and cider in 2001). Total alcohol consumption per capita in 2006 was 5.3% down from the all time peak in 2001. Beer consumption was down 15.3% from its peak.

But as I noted in a previous post on the abuse of alcohol statistics, there is little or no analysis of the actual causes of these declines in the HSE report. Other than an assumption that increases in excise duties (on spirits in particular) caused the decline charted in the report. The problem is, the decline in beer consumption (not affected by duty increases) accounts for 130% of the overall decline in alcohol consumption since 2001. But the HSE fails to explain the decline in beer sales.

Explaining trends in alcohol consumption is clearly about more than prices, taxes and their economic impact. Fashion, taste, marketing, demographics and innovation all have their part to play. So does the drinks industry itself. Indeed much of the decline in beer sales (and the poor performance of Irish pubs in general) can be attributed to greed, stupidity and short term thinking (by both the brewers and the publicans themselves). As witnessed spectacularly by the story of Stella Artois, or 'wife beater' as its owners would rather it wasn't known.

More worrying for me is the creeping air of 'nanny-state/it's for your own good' about so many of these public policy initiatives and recommendations. Alcohol is now being demonised the way cigarettes were in the past, with little acknowledgement that alcohol (unlike tobacco) can actually be good for you. Instead, we are all being punished for the temporary excesses of a declining population of young pub goers.

It does make me wonder where it will stop? How long before some government-funded research body starts to fret about our abuse of 1,3,7-Trimethylxanthine or caffeine as it is more commonly known (and loved)? After all, coffee has been linked to heart disease. Should the HSE promote a recommended daily coffee quota? And maybe require makers to print advice on coffee jars for pregnant women? It might seem ridiculous now, but consider that Imams and Popes in the past have tried to ban it, so maybe the Department of Health will succeed where other have failed?

But if that thought gets you down, then grab yourself a grande latte and indulge in this delightful essay on the joy and history of coffee. While it's still legal.

Sunday, December 2, 2007

Reasons to be Grateful

It's Sunday, so let's step back and see the bigger picture. This guy is Randy Pausch, a 47 year old professor of computer science at Carnegie Mellon University. He was diagnosed in August 2007 with incurable pancreatic cancer and given 6-7 months to live.

So he decided to give The Last Lecture on his childhood dreams and how many have come true. In other words, an exercise in gratitude despite the 'death sentence' he now faces. The lecture has become something of an internet phenomenon, simply because of the way in which it celebrates a life well lived - something all of us only get one shot at.

Randy personifies something psychologists and economists understand more abstractly: gratitude is good for you. In fact, simply sitting down once a week to write about five things we are grateful for can boost our happiness by 25%. So there you have it: just watch Randy's lecture and you won't have any trouble coming up with five reasons to be grateful.

Saturday, December 1, 2007

The Inequity of Inequality

Inequality is always a sensitive subject. It defines the political spectrum (the further left you go the more important equality as a policy objective becomes, and vice versa as you go rightward). For many of course it is also a moral issue: especially in the context of global extremes of wealth and poverty.

Often it is difficult to get good, reliable information on equality in Ireland, but like the long awaited bus that arrives in a convoy of three, we find ourselves in receipt of three reports this week that touch on the topic of inequality. Two are from the CSO: Equality in Ireland and the EU Survey on Income and Living Conditions; and a third is from Forfás: the Annual Competitiveness Report.

To take the Forfás report first, though not ostensibly about inequality it contains a chart (Figure 2.07 on page 27 of the pdf) which purports to show that the level of income inequality deteriorated between 2000 and 2005. The measure used is that of the Gini Coefficient, illustrated in the diagram here. In a world of perfect income equality the distribution of income (on the vertical axis) by population (on the horizontal axis) would match perfectly - giving a straight 45 degree line. In the real world that just isn't the case, and you get a curved line as in the graph. The bigger the gap between the ideal straight line and the curved line (shaded blue in the diagram) then the more unequal is the income distribution in the population being measured. The Gini Coefficient is the ratio of the shaded blue area to the total area formed by the triangle in the diagram.

A Measurement Problem

Does it matter that income inequality has apparently worsened in Ireland since 2000? Firstly, we don't know if it has actually worsened as the Gini Coefficient is just a statistical device subject to some severe drawbacks. As Wikipedia notes in a thorough analysis of this approach to the measurement of inequality:
  • As with other inequality coefficients, the Gini coefficient is influenced by the granularity of the measurements. For example, five 20% quantiles (low granularity) will usually yield a lower Gini coefficient than twenty 5% quantiles (high granularity) taken from the same distribution. This is an often encountered problem with measurements.

  • The measure will give different results when applied to individuals instead of households. When different populations are not measured with consistent definitions, comparison is not meaningful.
  • As for all statistics, there may be systematic and random errors in the data. The meaning of the Gini coefficient decreases as the data become less accurate. Also, countries may collect data differently, making it difficult to compare statistics between countries.

  • Care should be taken in using the Gini coefficient as a measure of egalitarianism, as it is properly a measure of income dispersion. Two equally egalitarian countries with different immigration policies may have different Gini coefficients.
So the Forfás data on a deteriorating gini coefficient tells us nothing about the trend in inequality per se (and possibly more about the impact of immigration over the same period).

What About Poverty?

For most people, a concern about income inequality is essentially a concern about poverty and a worry that a 'rising tide' simply doesn't raise all boats. Which brings us to the CSO's report on Income and Living Conditions in Ireland. You probably saw the headlines during the week:

"Number of people in poverty in Ireland falls sharply since 2003"

No - you didn't see the headline? Don't worry, nor did I. In fact, the CSO report shows that the percentage of the population at risk of poverty (using a relative measure of 60% of equivalised total disposable income) has fallen from 19.7% in 2003 to 17% (of a larger population on much higher incomes) in 2006. A cause for celebration you might have thought - but for the most part the story (where it was covered at all by the print media) has been confined to a minor story in the home news section. Somehow I don't imagine the story would have gotten the same treatment if the CSO had reported a sharp increase in poverty since 2003, but that's just me letting my inner cynic have his say ...

The point, however, is that despite a rise in the Gini Coefficient measure of income inequality, other, more direct measures of poverty show a marked improvement in the wellbeing of those on lower incomes relative to the total population. Inequality and poverty are totally separate issues in Ireland, and whatever about political perceptions of inequality the really good news is that fewer and fewer of our fellow citizens are experiencing economic deprivation.

A Smorgasbord of Inequality

Which brings us to the most entertaining of the three reports referencing inequality in the past week: the CSO's Equality in Ireland 2007 report. Though the poverty lobby may become a victim of its own success as poverty declines in Ireland; the 'indignation lobby' have lots of other things to fret and fuss about. The Equality in Ireland report treats us to an assessment of the current state of the nation in relation to 'Nine Equality Grounds' namely:
  1. Gender
  2. Marital Status
  3. Family Status
  4. Sexual Orientation
  5. Religion
  6. Age
  7. Disability
  8. Nationality & Ethnicity
  9. Traveller Community
The report contains some 'shocking' statistics including the following:
  • 'Married' is the most common marital status at 46.4% of all aged 15 and over.
  • 98% of all 18-64 year olds are heterosexual.
  • 86.8% of adults aged 15 and over are Catholics.
  • 90.7% of adults aged 15 and over do not have any disability.
  • 88.8% of people in Ireland are Irish nationals - and 87.3% of them are white.
  • 99.5% of people in Ireland are not travellers.
Of course, these are not the statistics that the report focuses on: but that's just me having fun with statistics. However the really important number is: what proportion of people actually experience discrimination across any of the 'Equality Grounds'? The grand total is just 12.5% (see figure 1.11 on page 13 of the report). That's right, despite all the opportunities to 'experience discrimination' if you are single, female, gay, elderly, disabled, a traveller, a non-Catholic, non-Irish or non-White, just one person in eight has 'experienced discrimination in the past two years'.

Though as a white, Irish, middle-aged male (in reasonably good health) I do find myself feeling a little aggrieved at all the attention (and taxpayers money) so many folk are getting. Now I wonder if that is grounds for discrimination proceedings ... ?

Friday, November 30, 2007

Sex and Consumer Confidence

The sharp fall in the Irish consumer confidence index this month to a low of -18 from -12 in October is worrying. The last time confidence was this low was in September 2003, and before that you have to go right back to December 1993 to find similar low levels.

The European Commission's survey gives a useful breakdown of the different components of the index. The index is a composite of consumers' views about the outlook for the economy as well as their views about their own financial circumstances and prospects. Through most of 2007 a gradual weakening in consumer confidence has been driven mostly by more negative views about the economy; but the November decline is driven equally by negative views about the economy and about consumers' personal circumstances.

The Commission's analysis does not however separate out consumer confidence by gender. This is a pity, as new research shows that men are consistently more optimistic in consumer confidence surveys than women. So it may well be a decline in female consumer confidence that has lead to the sharp fall in November.

Does it matter? In the long run probably not (as more tangible economic variables like GDP growth, unemployment levels and inflation rates drive economic wellbeing). But in the short run it most definitely matters - especially in relation to retailing and the prospects for sales in the run up to Christmas (driven mostly by female consumers). There is one small comfort however: a recent study - 'Men Buy, Women Shop' - has found that women like to shop more than men do (yes, I didn't think this needed researching either when I read it). But the implication is: when the economic headlines are getting women down, then a bit of retail therapy may be what the doctor ordered. And the economists as well for that matter.

So the consumer confidence index may be weakening, but the urge to splurge remains as strong as ever - for now.

Tuesday, November 27, 2007

Good Day at Blackrock

I snapped this as I was leaving home this morning. Listening to Ben Harper singing 'Morning Yearning' on my iPod. Carlsberg don't do mornings, but if they did ...

Monday, November 26, 2007

Will They Stay or Will They Go?

The thought struck me the other day: what if all the immigrants who have come to Ireland in the past ten years just upped and left for better opportunities elsewhere? I actually found the thought quite disturbing - guess I'm getting used to our new diversity (and the friendly service at my local coffee shop).

What got me thinking was the latest report from the CSO on the Irish labour market and the statistics on non-Irish nationals entering the workforce (see Table A1). There was a recent furore in the UK over government data showing that more than half of all new jobs there had been taken by foreigners since 1997. In contrast, we are sanguine about the (CSO) fact that non-Irish nationals took 71.6% of new jobs created in the year to Q3 2007.

Intriguingly, the CSO admits that it really doesn't know how many non-Irish nationals are actually in the workforce at present, admitting that:

The nationality figures presented have been described as tentative as they have not been revised in line with the most recent Census of Population data. Initial analysis suggests that the QNHS under-estimates the foreign national population by approximately 20–25%.

Of course our sanguine response to such findings is simply a reflection of the fact that most Irish people see immigration as a relatively benign phenomenon in Ireland - with a few caveats about asylum seekers and illegal immigrants. In marked contrast, I recently heard the Maltese Minister for The Family & Social Solidarity (Dolores Cristina) talking about Malta's problems with illegal immigration from Africa. It made me realise that Ireland's 'problems' are in the ha'penny place by comparison.

Yet there is no doubt that attitudes towards immigrants (including legal migrants) is turning negative across Europe (including Ireland) - as highlighted in this week's Economist. I have written in a previous post about the negative consequences of a rapid increase in immigration on host communities.

Equally there is no doubt that immigration is generally a good thing for the migrants (and their families) themselves. Even their home countries benefit, judging by the value of migrants' remittances to their love ones back home. Perhaps this explains the success of Western Union, which has five times as many locations worldwide as McDonald’s, Starbucks, Burger King and Wal-Mart combined.

A recent report by Eurostat values remittances abroad by immigrant workers in Ireland at €0.5 billion in 2006. €0.4 billion of this was intra-EU 27. That is money out of after tax income. So if you apply a multiple of, say, x6.6 to get total after tax income (assuming a 15% 'remittance or savings rate'); and then apply a multiple of, say, x1.45 to get gross income before tax, that gives total earnings for (we suspect) mainly Eastern Europeans and remitters from developing countries of nearly €5 billion last year. Though this is likely to be an underestimate as not all immigrants remit money (or save for that matter).

The point is that most immigrants in Ireland have come here because it is economically advantageous for them to do so. If their economic circumstances change - or better opportunities arise elsewhere or back home - then many will move. Those receiving the remittances may insist on it. So it is a brave man (or government minister) who trys to predict the future of immigration in Ireland: our own migration experiences of one-way tickets to America or Australia may not be much of a guide to the future in an age of €10 Ryanair tickets to Bratislava.
Maybe we should ask Western Union for their prediction?

Sunday, November 25, 2007

Run, It's a Bear!

Apparently plunging stock prices ignite the same neurons that respond to a lion’s roar - or a bear's for that matter. According to the Telegraph, we respond within 12 milliseconds - or one-25th the time it takes you to blink your eye - to upsetting financial news; this is the time it takes to activate the amygdala, a structure in your brain that generates emotions like fear and anger.

Anyone who has been watching the slow motion car crash that is the Irish stock market lately (down nearly 40% since February, and almost 50% in the case of financial stocks) will probably have felt a primordial urge to run and climb the nearest tree. A completely understandable reaction in the circumstances.

The question now is whether it is safe to come down from the tree? Unfortunately in the short term the answer is no - and it may even be 'no' in the long term as well. It is estimated that the total value of securitised sub-prime loans was $1.2 trillion at the peak. The Federal Reserve Chairman Ben Bernanke has said recently that he expects $150 billion of these loans will be written off in the end. That's the optimistic view: the pessimists think the final write off will cost at least $400 billion. The problem is: 'only' $40 billion has been written off so far ...

And that, believe it or not, is the long term view for those of you clinging to the branches. The short term is very short term: tomorrow, Monday 26th November is the date set for the European Covered Bond Market to resume trading. No, I'd never heard of it either until last Wednesday, when the ECBC suspended inter-bank market making in covered bonds due to unprecedented volatility. Essentially, this is one of the key places the banks go to raise the money they need to provide mortgages and other long term loans. Both AIB and Bank of Ireland had to suspend issuing new mortgage-covered securities due to a lack of demand. If the market does not resume trading tomorrow then all sorts of problems could arise - a liquidity crunch for the Eurozone's banking sector potentially; or worse, the break up of the Eurozone itself?

Think I'll stay in the tree another while ...

Friday, November 23, 2007

In Praise of Mavericks

I had the great pleasure of hearing John Kearon, Chief Juicer at Brainjuicer, talking about innovation at The Persuaders Pudding Club in Dublin last night. John's (very funny) comments on the anti-creative practice that is brainstorming, and the oxymoron that is 'centralised innovation', certainly struck a chord with the audience.

I also found John's message surprisingly encouraging, i.e.: that real innovation 'happens at the edge', and is usually the result of mavericks working outside the system. I have written about innovation in a previous post, and I find myself in complete agreement with John. Certainly everything Brainjuicer are discovering about creativity, innovation and the true nature of genius supports the idea that - once you try to control or formalise innovation - you kill it.

Which is why I worry about our national approach to innovation: more 'command and control' than 'organic and fluid'. I think the recent initiative by eircom to provide seed capital for a range of potential web businesses may well deliver more value to the country in the long run.

Do check out the Brainjuicer Lab's for some great case studies and downloads on the subject - and do make sure you get along to the next Pudding Club: Irish marketing's real innovative edge.

Wednesday, November 21, 2007

Gone Nuclear

With the price of oil pushing $100 a barrel the nuclear debate is going to hot up. A new book 'Power to Save the World' by Gwyneth Cravens describes her conversion from nuclear sceptic to nuclear advocate. She's not the first and she won't be the last.

Her web site has an interesting guide to calculating your exposure to radiation - if you're reading this on a computer then you are currently being irradiated! Though not by as much as when you take a plane.

Like Cravens I have become convinced that nuclear should be part of our future energy mix in Ireland. As our energy security becomes increasingly vulnerable AND the share of renewables (mainly wind) in electricity generation increases, so we are going to need a clean, secure base load source of power. Coal and gas play that role now: nuclear could play that role in the future.

Will Ireland go nuclear? A Eurobarometer survey earlier this year showed that the majority of Irish people would consider nuclear power to protect our energy security and lower our dependence on oil (see page 8). So Irish voters will eventually be willing to go nuclear: it's just that when they do, we'll be at the end of a long queue of other countries who reached the same decision earlier. By which time it will probably be too late ...

By the way: for the most intelligent critique of nuclear power see David Fleming's new paper (an update of a version previously published by Feasta). His argument seems to be 'keep it if you've got it (for now)', or get it quickly as there isn't enough uranium to go round. Another reason not to delay in my view: though obviously that's not the conclusion Fleming reaches!

Monday, November 19, 2007

Affordable Democracy

The recent furore over pay rises for politicians and senior civil servants raises a number of interesting questions about democracy in Ireland. One thought struck me while reading about an interesting experiment in the United States - what if, instead of paying the politicians, we paid the voters for their vote? It might be a lot cheaper - the going rate in the US is $1 million for life: but one in five would sell their vote for the price of an iPod Touch!

I am joking of course. Still we do have a fundamental problem in that we simply have too many politicians, according to a recent European study. So I was relieved when the Constituency Commission decided to leave the number of TDs unchanged at 166. What about a deal with our political representatives: we'll increase your salaries if you reduce your numbers?

Perhaps the most annoying thing about the recent pay rises has been the simple fact that our representatives are not doing a particularly good job. The World Bank's Governance Indicators for Ireland show that the efficiency of the Irish government has actually deteriorated in recent years. Pay more, get less indeed ...

A final thought on politics: new in from the field of neuroeconomics and psychology - first impressions matter in choosing our political leaders (as much as in choosing our mate and in choosing washing powder). In fact, the first quarter of a second (250 milliseconds to be precise) is the most important time to make a good impression. Though giving yourselves unjustifiable pay rises may just undo those initial, favourable impressions ...

Saturday, November 17, 2007

Smile Like You Mean It

Or for 0.5 seconds to be precise. Preferably with your head tilted in the same direction as the person you are smiling at.
And who said economists couldn't be romantic? More (lots more) on psychology, neuroeconomics and simply understanding folks better at the wonderful Psyblog website.

Friday, November 16, 2007

Elves Cause Rain


Continuing my stand against 'junk research' here is a recent article from Wharton on the perils and pitfalls of polls.

As the author concludes:
The thing to think about with polls is the confirmation bias, which is basically that we are always looking for more evidence for the things we already believe in. If you are told as a child that 'elves cause rain, then every time it rains there is more evidence of elves.' We all end up with some set of opinions, but once we have them, we look for more evidence to reinforce them.

Thursday, November 15, 2007

The Pseudo-Science of Happiness

It is impossible to live a pleasant life without living wisely and honorably and justly, and it is impossible to live wisely and honorably and justly without living pleasantly. Epicurus
We are lucky in Ireland to have been spared - so far - the attentions of politicians intent on making us happy. This struck me as I listened to the latest podcast in the BBC Radio 4 series More or Less (which I have referred to in a previous post).

It features an entertaining debate between Richard Layard and Paul Ormerod on whether 'the happiness of the nation' should be a legitimate policy objective of government. Lord Layard has written a new book on the science of happiness. Paul Ormerod has written a critique of many of the assumptions behind the book, as well as addressing the wider debate about policy and happiness.

I have to confess to more than a dispassionate interest in this debate as (the then) Richard Layard was my micro-economics tutor at the LSE back in the 1980s; and subsequently I was a colleague of Paul Ormerod's at the Henley Centre for Forecasting. I have also had the opportunity to work on a number of studies in relation to happiness in Ireland, so it is a subject I pay close attention to as an economist and researcher.

As for the result of the debate itself, my (hopefully unbiased) opinion is that Ormerod won it hands down. His commentary on the 'psuedo-science' of happiness research is spot on: and should be mandatory briefing material for any politician or cabinet minister intent on making us happy. There's hope yet.

Tuesday, November 13, 2007

2008: Year Zero for Consumers?

I'm increasingly nervous about the outlook for Irish consumer spending next year. The consensus is still for modest growth - even if the consensus on 2008's prospects has weakened in recent months (see chart which shows changes to 2008 forecasts through the course of 2007).

Curiously, the stockbrokers seems more pessimistic than public sector forecasters about the outlook for spending next year. Though Bank of Ireland have produced the most optimistic forecast by far in recent months.

What gives me cause for concern is the latest Goodbody report on housing and the wider economy. Apart from a forecast of 3% growth in expenditure, which is at the lower end of expectations, two other things caught my attention:

1. Goodbody's are forecasting that the inflation rate will be greater than the volume rate of growth of consumer spending - the first time this has happened since 2001/2002. This means that most of the growth in spending next year will be driven by inflation, providing little real growth stimulation to the economy (and probably making consumers more price conscious and focused on value for money).

2. Goodbody's are also forecasting that real household disposable incomes will grow by only 0.1% in 2008 - in effect, zero growth in spending power (further reinforcing consumer awareness of value for money).

Of course, these are only forecasts - subject to revision like all the others. As with all impressions about the future, we must guard against 'projection bias' - our psychological inclination to assume that our experiences in the present are the best guide to the future.

Nevertheless, at this late stage in the year, it would be advisable to think again about any significant price increases you may have pencilled in for 2008. In a year that could see zero growth in spending power, your price increase might stick out like a sore thumb. Which would really hurt.

Sunday, November 11, 2007

Banks caught in a Prisoner's Dilemma

The case of solicitor Michael Lynn, whose practice has been shut down by the Law Society, is a powerful example of what economists call 'The Prisoner's Dilemma'. The 'prisoners' in this case are the banks that have loaned money to Mr. Lynn.

The Prisoner's Dilemma - or PD for short - goes like this (in the classical illustration from game theory):

Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. However, neither prisoner knows for sure what choice the other prisoner will make. So this dilemma poses the question: How should the prisoners act?
You might just be wondering what this has to do with the banks in the Lynn debacle? Well, consider this from a recent RTÉ story on the case:

The financial institutions are now involved in what was described as a 'competition' to register the properties offered to them as security for loans they issued. Lawyers for Bank of Scotland Ireland asked Mr Justice Johnson to change his order to allow Mr Lynn to comply with the undertakings he gave to them. IIB Homeloans asked the High Court for permission to bring the same issue before the Commercial Court.

The two banks want Mr Lynn to sign the necessary documents to allow them to register mortgages on the properties he offered them as security. But many of the other financial institutions objected to this.

Lawyers for Irish Nationwide said this could allow banks to 'jump the queue' in terms of trying to get their money back. Many of the properties, the court was told, would be subject to competing claims from several financial institutions.
So there you have it: if one bank ('Prisoner A' in the PD example) 'jumps the queue' then the other banks have to do the same (playing the part of 'Prisoner B'). The result: they are probably all worse off than if they had 'co-operated' by doing the equivalent of 'remaining silent'.

This is another illustration of the power of neuroeconomics to guide our understanding of trends in business and marketing. By the way, you can put yourself in the interrogation room and play the Prisoner's Dilemma game for yourself here.

So what next? I expect to see the Prisoner's Dilemma played out on an even bigger scale with some of Ireland's largest property developers and financial institutions. If you are a non-Irish bank involved in small, syndicated loans to Irish developers who are struggling with their interest repayments, then why not pull the plug now and get the bad news out of the way; after all, other financial institutions globally are announcing major write downs of bad debts on a daily basis? Irish banks, on the other hand, might hesitate to pull the plug given the battering their share prices have already taken - but that's Prisoner B's problem, right?

There is though a small consolation for any financial institution caught in the Prisoner's Dilemma: pure economic theory predicts that each prisoner will always 'rat' on the other prisoner, 100% of the time - leaving them both worse off than if they had remained silent. But experimental economics shows that people caught in the prisoner's dilemma actually co-operate (stay silent) 40% of the time. The other 60% of the time one or both parties end up much worse off. I did say it was a small consolation.
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